Term Life Insurance Contracts
The most common type of life insurance is Term Life Insurance. The “term” is a specific number of years where the coverage is guaranteed, usually with a “level” premium that most people prefer. Depending and the contract coverage amount, chosen term, policyholder age, and health, there will likely be an up-front health exam/questioning and or lab work.
The younger and more healthy you are, the lower the premium.
Level Term Life contracts are usually written for 20 or 30-year periods. Most Term Life contracts will continue policy coverage past the term, but the premiums will no longer be locked in at that point and may increase significantly (coverage may cease completely at a certain age). Of course, you can cancel your policy anytime if your financial situation changes. Term Life contracts have no defined cash asset value at any time, which makes these contracts substantially different than Whole Life and Indexed Universal Life.
Whole Life Insurance Contracts
Whole Life Insurance coverage is designed to build cash value each year, while also providing coverage for an entire lifetime. You do not age-out of your coverage as is the case with Term Life. The contract cash asset value will grow over time based on the premiums paid, and eventually, at a specified age, that cash value accumulation can eliminate the need for any ongoing premiums. Essentially at that point in time, the earnings on the cash asset value will be used to continue paying the internal premium once the policy is “paid off” at a certain threshold. For these reasons, Whole Life is both the most expensive and most complete coverage offered. Policy applicants will likely be required to participate in up-front health exam/questioning and lab work.
Whole Life is intended to be complete coverage on all major risks in your life…for your entire life: Adequate Family Emergency and Retirement Savings, Funds for LTC, and Tax-Free Inheritance Funding.
Whole Life contracts are also a preferred estate planning tool. When examining a person’s asset portfolio, there are very few other assets that offer the tax benefits of a whole life policy. High net worth individuals and business owners will often use Whole Life Insurance contracts to facilitate tax-deferred and or tax-free wealth accumulation, which provides for; wealth transfer, charitable gifting, estate taxes as well as business succession planning.
Indexed Universal Life Contracts
Indexed Universal Life Insurance (IUL) policies usually offer permanent coverage, and they provide more flexibility to select contract interest crediting methods. IUL policies will be less expensive than Whole Life, but more expensive than Term Life for the same coverage amounts.
Other than affordability, the primary advantage of an Indexed Universal Life policy is the flexibility that it provides, as well as the opportunity to earn a higher rate of return. Premiums are not rigid like most other coverages allowing the owner to adjust the cash value and death benefit (assuming insurability) throughout the contract life. Because of this, IUL Contracts do require a certain amount of self-discipline because the policyholder may cut back on their premium payments, which can start a negative trend in the contract cash asset value if not managed. The funds to pay the policy premium comes from the Cash Value Asset account, which helps prevent a coverage lapse (again, with discipline).
Annual interest rate credits paid to the policy Cash Value Asset account are calculated based on the indices specified in the contract. These indices work within the IUL Contract using the same annual interest crediting methods that FIAs (Fixed Index Annuities) use… Point to Point, Zero floor calculations with various Indices chosen each year by the Policy Holder. S&P500 is the most commonly used index. There can be half a dozen indices to choose from, as specified in each IUL Contract. Each contract year, the policyholder will select and allocate a percentage to each index crediting method for the upcoming contract year, and may also optionally choose an annual fixed interest rate option as part or all of the allocation.
Review Intelligent Direction’s “Point-to-Point Zero Floor CAP Index Educational Tool,” with the S&P500 Honesty Button, to understand IUL crediting methods
Another type of contract worth mentioning is a Guaranteed Universal Life Contract (GUL). GULs offer a guaranteed fixed rate of return (which with some carriers still might adjust slightly within specified limits over time, based on other criteria such as inflation and the general directions of interest rates as specified in the contract).
Single-Premium Life Contracts
Single-Premium Life (SPL) Contracts establish an immediate Tax-Deferred and or Tax-Free estate. These contracts are a variation of either a Whole Life Contract or an Indexed Universal Life Contract, the difference being that the Whole Life version is based on offering a fixed interest rate, while the IUL version allows annual index choices for interest crediting. Depending on the carrier and the SPL policy application parameters, the health and underwriting requirements might be less rigorous than for other Life Insurance contract types. SPLs perform more like an investment when compared to other forms of Life Insurance.
Before investing in any Fixed Index Annuity contract, because of similarities, it’s reasonable to also investigate IUL and/or SPL options to determine which contract fits the needs better.
Generally, a Single Premium Whole Life (SPWL) Contract buys a little less coverage for the one-time premium but initiates coverage with a higher contract Cash Asset Value. The Single Premium Indexed Universal Life (SPIUL) Contract offers a lower one-time premium, starts coverage with a lower policy Cash Asset Value but offers an opportunity for potentially higher earnings and accumulation later on.
Similar to the LTC Annuity Contract, there also exists a Single Premium Long-Term Care Life (SPLTCL) Contract offering what is a hybrid life insurance and long-term care policy. The cash value of the policy can be used specifically for Long-Term Care, and offers some tax advantages over other annuity and insurance vehicles.
Long Term Care Contracts
Long-Term Care (LTC) coverage (or the lack of it) probably is the number one financial concern for the middle to upper-middle class people aged 50 and older today. These are the same people who are trying hardest to preserve and accumulate wealth and protect assets, and they worry about what amounts to an undefined future need for long-term care.
Most people have a pretty good idea that LTC coverage can be expensive, and requires decent health at a younger age to start on a lower premium scale. For a “healthy” individual, the retrospective antidotes from older friends and relatives are sometimes negative; “why pay several thousand dollars per year for something that you don’t use?” Hard to argue with that, except that when you need it, you really need it. The actual cost of long term care can be $75,000 per year and up. For people aged 65 and older, over 60% of them will use LTC at some point…and for some, it becomes a very long and permanent situation. Amazingly, for people aged 18 to 64, over 40% of that age group will require LTC at some point in their lives.
Medicare does not cover LTC. Medicaid/MediCAL allows you to only have minimal assets remaining before it covers LTC, and the coverage will only be accepted at certain facilities.
Medicare does not cover Long-Term Care as many believe. So if you require permanent LTC later in life, and you have few assets and little income beyond social security, you are probably looking at a “spend down” situation as the government medical complex (Medi-CAL and Medicaid) takes over and becomes your LTC option. The key is to recognize this situation early enough in life so that you have enough assets and retirement income to manage yourself out of this situation. The other annuity and insurance contracts on this website are all options and up for discussion to assist in that goal.
To qualify for Long-Term Care benefits under an LTC contract, generally, you are NOT able to perform at least 2 out of 6 of the basic Activities of Daily Living (ADL):
- Eating
- Dressing
- Bathing
- Transferring
- Continence
- Toileting
Some LTC Contracts include benefit provisions for home care. It’s very important to read and understand the specifics in these LTC contracts, as they can be very complex.
During working years, many people will have disability coverages through their employers (and SSA), but again that isn’t Long Term Care. Very few employees get offered LTC as part of any retirement package. Without a pre-existing employee benefit for LTC, the options are; 1) Buy LTC coverage, and the younger and healthier you are the less expensive, 2) Accumulate wealth and eventually “self-fund”, 3) Take the risk.
Intelligent Directions Insurance Solutions functions to mitigate risk. We can assist in;
- Finding LTC Contract Coverage for you, while also working to help accumulate wealth.
- Help determine how best to “self-fund” a potential negative life event.
- As a supplemental step, when looking at Annuity and Life Contracts for other needs, keep an eye towards LTC dual-purpose provisions and riders. While LTC annuity and life riders may not provide full coverage, they can assist and or provide a bridge to other long-term solutions.
